Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

U.S. Economy Heading For the Rocks?

Economics / Recession 2008 - 2010 Jun 14, 2010 - 03:43 AM GMT

By: Gerard_Jackson

Economics

Best Financial Markets Analysis ArticleIf you read Reuters, Associated Press and the rest of the phony news outlets the US economy is on the mend and it's only a matter of time before happy days are here again. If you are one of the unemployed or underemployed things are indeed gloomy. And no wonder. The Wall Street Journal reports that in the first quarter not one venture-backed company went public. This hasn't happened since 1980. Adding to the economy's woes we find that of the 431,000 non-farm jobs created last month a mere 41,000 was in the private sector, less than 10 per cent. To top it off, manufacturing also started to slow.


So much for the wonders of big-spending government and its regulatory chains. Only now are some politicians waking up to the fact that the Sarbanes-Oxley legislation might be amounting to a massive ball and chain that is holding back an entrepreneurial led recovery. Making matters worse is Obama's impending blizzard of regulations and the accompanying paperwork that will swamp small and medium size businesses. If that's the economic anvil the coming tax increases will be the hammer. This is not a good time to be a small American businessman.

A while ago I pointed out that so long as there was sufficient capital and land to employ people there cannot be permanent widespread unemployment in a free market. Some Readers are demanding to know that if this is right then why is unemployment so high? Because in America the free market is being badly crippled -- and it's getting worse. The Democrats have no understanding of free markets nor do they care to obtain any. Their ultimate aim is not sustained economic growth -- without which there is no prosperity -- but sustained economic power for themselves, irrespective of the cost to the country. The massive spending programs and their contempt for the electorate is ample evidence of that fact.

Given this situation is it any wonder that the American economy appears to be heading for the rocks? But as any seaman will tell you the most dangerous rocks to navigate are always those below the surface. The same can be said of the US economy. What bothers me -- and it applies to all other economies -- is not dismal economic indicators but the dismal level of the economic knowledge of millions of Americans. Although the great majority instinctively lean to free enterprise it cannot be denied that leftist thinking has greatly influenced public opinion.

This is why so many Americans can favour more controls on business while still favouring free enterprise. They have yet to see that this amounts to saying business needs to be increasingly chained in order to make it freer and more efficient. Needless to say, there will always be an ample supply of what Adam Smith aptly called "that insidious and crafty animal, vulgarly called a statesman or politician" to encourage this misguided line of thinking.

And this is what we are really facing: misguided thinking. Right across the intellectual spectrum we find ancient economic nostrums being flaunted as deep economic insights that can restore prosperity if only the state had the will to implement them. One of these nostrums is that government spending is the true road to recovery. It isn't and it never was. Pushed too far government spending can actually destroy an economy.

Robert Reich is Professor of Public Policy at the University of California at Berkeley and an excellent reason why you should keep your children away from a university. Recessions always bring forth an abundance of economic cranks and he is no exception. Unfortunately much of what he has to say can be found in the standard textbook. He stated on his blog that:

Why are we having such a hard time getting free of the Great Recession? Because consumers, who constitute 70 percent of the economy, don't have the dough. They can't any longer treat their homes as ATMs, as they did before the Great Recession.

This used to be called the underconsumption fallacy and was rightly treated with contempt by the classical economists* who understood what the great majority of contemporary economists apparently cannot: and that is that production pays for itself. In other words, demand springs from production, meaning that the means to produce always supplies the means to buy. Supplies constitute demands, as they used to say in the nineteenth century.

The only time this relationship appeared to breakdown is when, as the older economists put it, production was deranged. This was the result of investment expanding disproportionately to consumption, and was considered a monetary phenomenon. Unfortunately in the 1840s the early wisdom was superseded by what one might call the Wilson-Mill "irrational exuberance" theory in which the monetary component dropped out of sight. This was followed in the 1930s by the even worse Keynesian theory. And now look where we are.

But it goes without saying that Reich's opinion is not only plausible but self-evident. Is it not a fact that consumer spending makes up about 70 per cent of GDP? Yes it is. However, GDP is not a true measure of total economic activity because it omits intermediate spending on the spurious grounds that to include it would amount to double-counting. But once we do include it consumer spending drops to about one-third of total spending, indicating that business spending is what really drives the economy.

Focusing on the 70 per cent statistical fiction leads to the conclusion -- though it is rarely if ever stated -- that the US is a two-stage economy: the production stage and the consumption stage. Even on the surface this is a ridiculous view. No one denies that production takes place in stages and through time. What is being overlooked by the mass of today's economists is the enormous ramifications of this fact, one of which is that encouraging consumer spending can retard recovery and weaken production. There was a time when this fact was never a matter of contention. During the Great Depression it was noted:

The larger number of payments is not from consumers to producers, but is made between producers and producers, and tends to cancel out in any computation of net incomer of net product value. "In fact, income produced or net product is roughly only about one-third of gross income." [Italics added]. What is cost for one producer is in part income for some other producer, but part of that income the latter has to pay out in costs to other producers in another stage of the productive process (for intermediate products, raw materials, supplies, etc.), and so on. All that is necessary in order that equilibrium be maintained is that consumers' incomes equal the cost of producing consumers' goods; the total of producers' payments necessarily exceeds that of consumers' incomes. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, p. 71).

In English so plain that even Mr Reich can understand it: consumer incomes are always exceeded by total expenditure on production. If Reich and the rest of the economic commentariat were right every economy in the world would be permanently and irredeemably depressed because there is no way that consumer incomes can ever equal or exceed total production costs.

If the public had -- or at least the country's economic pundits -- a far better understanding of how the economy functioned Obama's destructive economic policies would never have got off the ground.

*Malthus can be considered the exception, though in his later years he paid far less attention to the problem of depressions. His writings on the question of universal gluts conveyed to me the impression that he failed to fully grasp what proponents of what became known as Say's law were actually saying. See Say's Letters to Malthus as well as Ricardo's defence of Say's law.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2010 Gerard Jackson

Gerard Jackson Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife